There’s Still No Place Like Home

by Adam Grossman of Riverfront Investment Group, 10/31/25

Summary

  • We believe international stocks are not as ‘cheap’ as they first appear.
  • The outperformance of the US has been due to superior earnings growth, in our view.
  • There are 3 potential themes that could shift returns in favor of international… but currently we still prefer US stocks.

Our Framework: ‘Price Matters’… but So Does Macro and Earnings Data

A question RiverFront often gets is when we will go ‘overweight’ on international equities, after almost fifteen years of disappointing returns. Emerging Markets (EM) and Developed International (EAFE) indices are both beating US markets year-to-date, which has only happened 3 years in the last decade. It is a fair question, given continued all-time highs and the concerns some have over elevated valuations in the S&P 500. Using our Price Matters® framework, which attempts to draw a long-term total return trend through equity prices, we can see that as of Aug 2025, developed international equities (as represented by the MSCI Europe, Australasia and Far East Index – aka EAFE) are right at their long-term trend of 4.4% (see Chart 1, below), which is 2.1% lower per annum than their US Counterpart. With US Stocks +47% above their much faster trendline, the relative valuation argument for international appears compelling, although there are a lot of caveats we would make; trend analysis is as much ‘art’ as ‘science’, especially as international does not have nearly as much data to analyze as the US. Thus, today’s Weekly View is a deeper exploration of what conditions we think will be necessary in order for International to outperform US Markets.

CHART 1: INTERNATIONAL STOCKS RIGHT AT LONG-TERM TREND

international stocks right at long-term trend

Source: RiverFront Investment Group, Factset. Data from Jan 1970 through Nov 2023. Past performance is no guarantee of future results. It is not possible to invest directly in an index. RiverFront’s Price Matters® discipline compares inflation-adjusted current prices relative to their long-term trend to help identify extremes in valuation. Blue line represents the MSCI EAFE (local) Real Return Index. Yellow line represents the Annualized Real Trend Line of MSCI EAFE (local) Real Total Return Index according to Price Matters®. Shown for illustrative purposes only, not indicative of RiverFront portfolio performance. Information or data shown or used in this material was received from sources believed to be reliable, but accuracy is not guaranteed. The chart above uses a logarithmic scale. Line movements will be dampened/subdued based on the exponential y-axis.

Valuations do matter… but we also believe that the more favorable economic environment, combined with stronger profitability and earnings growth, can justify higher valuations in the US versus international. Thus, we believe the US’ valuation gap versus peers is justified when we take a step back and look at the complete picture. Simply put, a much stronger profit trend can justify a premium valuation when viewed through the following lenses:

  1. The Macroeconomic Environment: In our view, most economic data is like “blood pressure;” any reading that is too high or too low requires action by a fiscal or monetary authority. We believe there is a sustainable level of economic growth and inflation at which well-run companies can thrive. For example, inflation growth rates of 2-3%, along with positive trending leading economic indicators, is a good combination for equity returns, in our opinion.
  2. Evidence that Earnings Are Capturing Economic Growth: Using a combination of historic and consensus earnings analysis, we attempt to identify stable and growing earnings patterns that are consistent with current economic activity.
  3. A Reasonable Starting Valuation: We see valuation as a long-term sentiment gauge of a market’s earnings power and profitability. Without a view of this earnings power – and the economic forces that drive these earnings – we can easily overpay for growth, or buy assets that appear ‘cheap’ but fail to generate consistent earnings. Thus, we view valuation as a ‘condition’… and not necessarily a ‘catalyst’ to generate outsized returns.

US and International Markets Thrive in Different Business Climates… and the Last Decade Favored the US

One major difference between the composition of US large-caps and EAFE is that the US has a much higher weighting towards ‘growth’ companies, whereas EAFE is dominated by ‘value’ companies. Specifically, stocks of growth companies tend to thrive in lower-interest-rate environments, where GDP growth tends to be lower. In these environments, their organic growth provides attractive levels of profitability, and they can utilize low interest rates to repurchase shares (and thus reduce their share count), using cheap debt. Put simply: growth companies are adept at squeezing attractive earnings growth out of a slow and steady economy such as the one that we’ve seen for the last half-decade. Luckily for the S&P 500, the US large-cap space is stocked with growth companies in areas like technology, consumer discretionary and communication services.

On the other hand, value companies tend to perform well in times of elevated economic growth. The higher growth helps cover their higher fixed costs, which then allows for higher margins on sales; we call this “operating leverage.” Put simply: when economic growth is high, operating leverage tends to allow value-oriented companies’ earnings to outgrow more stable, less economically sensitive sectors. International Markets like EAFE tend to be much more value-oriented, with larger weightings to sectors such as industrials, energy and financials.

us outearning europe em since 2008

Source: LSEG Datastream, RiverFront; data weekly, as of 10/24/25. Chart shown for illustrative purposes only. Past performance is no indication of future results.